Lego grew too fast for its own good and now it’s paying the price

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Lego, the world-beating Danish toymaker, reported an unexpected drop in profit today, down 3% in the first half of 2017, to 3.4 billion Danish kroner ($543 million). The decline comes after full-year sales growth last year was the slowest in nearly 10 years, ending an outstanding run of double-digit increases. Revenue fell 5% in the first half.

As a result of declining sales and profit, the company will lay off 8% of its workforce, or about 1,400 jobs, and focus on fewer initiatives in the future. Jørgen Vig Knudstorp, Lego’s chairman, blamed the shortfall on the company getting ahead of itself in the pursuit of rapid growth. “We have added complexity into the organisation which now in turn makes it harder for us to grow further,” he said in a statement. “As a result, we have now pressed the reset-button for the entire Group.”

Knudstorp says the “reset” will feature cost-cutting, both via layoffs and a simpler business model that will entail “a clean-up of inventories across the entire value chain.” In recent quarters, retailers like Toys R Us have reported soft demand for Lego sets. The revamp will also feature “innovative ways to blend physical building and digital experiences,” Knudstorp said.

The company has hired and spent aggressively in recent years, fueling growth that propelled it to the top of the toy heap. Its $2.4 billion in first-half revenue puts it comfortably ahead of Hasbro’s $1.8 billion and Barbie maker Mattel’s $1.7 billion in sales during the same period. Over the past decade, Lego’s workforce has more than tripled in size.

There were signs that not all was well at Lego even before today’s news. In January, Bali Padda took over as the company’s CEO from Knudstorp, whose 12-year run as boss was marked by remarkable growth (paywall) following a brush with bankruptcy. Padda was the first non-Dane to become CEO in Lego’s 85-year history. But the 15-year veteran of the company did not last long. Last month, Lego abruptly replaced him with Niels Christiansen, the former chief executive of Danish industrial group Danfoss.

The family-run company’s friendly image is hard to maintain when announcing more than 1,000 layoffs, but Lego expressed humility at the need to let workers go. “We are very sorry to make changes which may interfere with the lives of many of our colleagues. Our colleagues put so much passion into their work every day and we are deeply grateful for that,” Knudstorp said. “Unfortunately, it is essential for us to make these tough decisions.”